US Futures Resume Slide As VIX Rises: Dow Set To Open Down 200 As Dip Buying Fails In Asia

Original post

“To Buy, or not to buy the dip”, that is the question this morning across the world.

In the US, for now, the answer appears to be no, as yesterday’s dead cat bounce is hanging, with S&P futures retreating, even as European stocks rebound, and while Asia started off well higher, it faded almost all gains paring earlier gains, with Chinese shares dropping and Japan and South Korea fading gains of as much as 3%. Meanwhile, S&P 500 futures are down 0.6% after gaining 1.7% Tuesday, and the Dow is set to open around 200 points lower after adding 2.3%.

Understandably, attention is squarely focused on the VIX, which is elevated and remains glued to 30 where it was at the Tuesday close, not providing much clarity in terms of direction.

“The stock market has a way of “cleansing out” the emotion and rhetoric. While we never like to see clients lose money, investors need to remember that pullbacks, corrections, and pauses are vital components to any secular or cyclical bull market. Yes – the bull market is very much alive. This too shall pass,” Brian Belski, chief investment strategist at BMO Capital Markets, wrote in note. “As such, allow the market to do its job and focus on the fundamentals of investing relative to the noise, machines, and emotion.”

Asian markets were mixed, mostly higher as the region attempted to track Wall Street’s rebound where stocks found shelter from the 2-day violent market turmoil on dip buying, which saw S&P 500 briefly reclaim 2700 and the DJIA home in on the 25000 level. Australia (+0.8%) traded positive in which energy and resources names led the recovery as commodities rebounded, while Japan’s Nikkei 225 (+0.2%) was initially the best performer and gained over 3% in early-trade before it gradually pared most the advances amid a choppy currency and as momentum waned. China, meanwhile, saw surprising weakness, with Hang Seng (-0.9%) and the Shanghai Comp. (-1.8%) both lifted at the open by the early rising tide, although mainland stocks then retreated amid Shenzhen volatility and after the PBoC continued to drain liquidity from the banking system with its inaction.

The broad Asian weakness was especially evident in Korea, which saw the Kospi open at the highs, only to fade all day and close at session lows.

After yesterday’s sharp losses, Europe’s Stoxx 600 gains 0.8% in early trade, bouncing after a seven-session selloff which sent the index to its lowest level since August 2017. The benchmark still remains down 7% since peak on Jan. 23; and is below both the 50- DMA, 200-DMA. Euro Stoxx 50 up 0.7%, DAX up 0.7%, CAC up 0.5%, FTSE 100 up 1%, FTSE MIB up 0.9%, IBEX up 1.1%.

Over in FX, it has been another day of choppy price action for the major currencies, and yet the ranges remain tighter compared to other asset classes, as they remain buffered and – so far – immune to the stock turbulence. The dollar picked up as U.S. futures pointed to a lower open and Treasury yields fell, while VIX rebounded.

The yen led gains in G-10 even as European equities traded in the green and Asian counterparts were mixed. The EUR/USD reversed gains to trade as much as 0.3% lower, with the retreat coming amid a strong BBDXY rebound that reverses an early drop of 0.2%; the USD/JPY stayed near day low of 108.92 as Treasuries remain supported; Cable dropped by 50 pips within 10 minutes, heads below 1.39 after reaching a day-high of 1.3994 in European morning as algo trading in the pair continues to dominate. According to Bloomberg, sellers of FX volatility in the majors emerged across tenors.

WTI and Brent crude futures are trending lower this morning, with the latter breaking below USD 67.00/bbls despite the last nights API crude inventory data showing an unexpected drawdown. Some of the bearish sentiment could be attributed to the latest EIA forecasts, in which the agency upped their US oil production led by shale to 11.2mln bpd in 2019 from 10.85mln bpd. In metals markets, spot gold is modestly higher whilst copper was supported during Asia-Pac trade amid the improved risk appetite.

Several Fed representatives are due to speak. Economic data include mortgage applications, consumer credit. Scheduled earnings include Fox, Tesla, Suncor Energy

Market Snapshot

  • S&P 500 futures down 0.6% to 2,673.00
  • STOXX Europe 600 up 0.8% to 375.85
  • MSCI Asia Pacific up 0.2% to 173.46
  • MSCI Asia Pacific ex Japan down 0.1% to 567.73
  • Nikkei up 0.2% to 21,645.37
  • Topix up 0.4% to 1,749.91
  • Hang Seng Index down 0.9% to 30,323.20
  • Shanghai Composite down 1.8% to 3,309.26
  • Sensex unchanged at 34,196.75
  • Australia S&P/ASX 200 up 0.8% to 5,876.81
  • Kospi down 2.3% to 2,396.56
  • German 10Y yield rose 0.2 bps to 0.694%
  • Euro down 0.2% to $1.2359
  • Italian 10Y yield fell 3.7 bps to 1.72%
  • Spanish 10Y yield fell 5.2 bps to 1.374%
  • Brent Futures up 0.07% to $66.91/bbl
  • Gold spot up 0.4% to $1,329.84
  • U.S. Dollar Index up 0.2% to 89.73

Top Overnight News

  • House passes stopgap spending bill to fund U.S. govt until March 23
  • Prime Minister Theresa May is unlikely to provide the kind of clarity on her government’s Brexit blueprint that the European Union wants by the end of this week, according to a senior U.K. official; Banks must continue to prepare for any outcome, including a hard Brexit, ECB Executive Board member and Supervisory Board vice chair Sabine Lautenschlaeger says
  • German Chancellor Angela Merkel’s bloc and the Social Democratic Party have agreed on the ministries each will get in a coalition government, people familiar with the matter said; Hamburg Mayor Olaf Scholz will be Germany’s next finance minister, DPA reports without saying where it got the information
  • Nomura Holdings Inc. issued an apology after investors in a $300 million product betting on low volatility were all but wiped out during this week’s stock-market turmoil. Nomura said it will redeem the exchange-traded notes at 1,144 yen per unit, a 96 percent discount to the previous day’s close
  • Fed’s Bostic sees slow gradual rate hikes pace if growth robust: CBS
  • China Jan. FX Reserves rise $21.5b from Dec. to $3.16t, 12th consecutive increase
  • India: holds rates unchanged at 6.00% as expected; policy stance stays neutral
  • API inventories according to people familiar w/data: Crude -1.1m; Cushing -0.6m; Gasoline -0.2m; Distillates +4.6m

In Asia, equity markets were mostly higher as region attempted to track the rebound on Wall St. where stocks found reprieve from the 2-day market turmoil on dip buying, which saw S&P 500 briefly reclaim 2700 and the DJIA home in on the 25000 level. ASX 200 (+0.8%) traded positive in which energy and resources names led the recovery as commodities nursed losses, while Nikkei 225 (+0.2%) was initially the best performer and gained over 3% in early-trade before it gradually pared most the advances amid a choppy currency and as momentum waned. Elsewhere, Hang Seng (-0.9%) and Shanghai Comp. (-1.8%) were both lifted at the open by the early rising tide, although mainland stocks then retreated amid Shenzhen volatility and after the PBoC continued to drain liquidity from the banking system with its inaction. Finally, 10yr JGBs shrugged off the initial safe-haven outflows and returned flat, as price action proved to be as indecisive as the recovery in Japanese stocks. Furthermore, the BoJ’s Rinban  announcement failed to spur any market reaction as the bank kept its purchase amounts in line with the previous. PBoC skipped open market operations again today for a net daily drain of CNY 100bn.

Top Asian News

  • India Holds Rates Again to Balance Weak Growth, Strong Inflation
  • Masayoshi Son Plans Push to Cut Discount on SoftBank’s Stock
  • More Rich Chinese Forgo Hong Kong, Invest in Singapore Instead
  • Even Mainland Chinese Investors Are Abandoning Hong Kong Stocks
  • Yuan Nears Pre-Devaluation Level Despite China’s Policy Hints

European equities (Eurostoxx 50 +0.7%) are broadly higher this morning in a typical dead cat bounce. US equity futures are pointing to a negative open on Wall Street, which has capped the upside this morning. European bourses are also failing to be excited by the reports of an agreement between the CDU, CSU and the SPD to form a grand coalition. In terms of stock specific movers, earnings continue to dictate price action with earnings from Rio Tinto (flat), ABN Amro (-2.7%), Sanofi (-1.8%). The healthcare sector will come into focus when GSK report their latest financial reports at midday.

Top European News

  • Osram Sees Slowdown in Headlamps as China Car Sales Dip
  • ARM Embraces Tech Revolution Under SoftBank and Loses Money
  • Spain Nominates de Guindos as Candidate for ECB Post

In FX, the Dollar is broadly firmer against all G10 rivals apart from the Jpy, which has tested the resolve of bids at 109.00 again amidst more topside flow/heavy offers in Jpy crosses such as Eur/Jpy and Gbp/Jpy. However, the DXY has failed to sustain a rebound above near term resistance (89.600 treble top and then 89.700-750) or seriously challenge the next key tech levels above 90.000 (between 90.113-150). Hence, Wednesday could be key for the Buck in terms of whether its recent recovery continues or the end-2017 through January bear market resumes, and this also applies to Wall Street and equities in general after Monday’s rout and partial recovery yesterday. Looking at headline currency pairings, Eur/Usd is drifting lower having breached the 1.2400 level amidst conflicting headlines about a deal or no deal struck on a German grand coalition, but comfortably above the 20 DMA at 1.2303, while Cable has retreated further from 1.4000 and through a similar MA at 1.3958 to a 1.3920 low amidst reports that the EU will insist on harsh Brexit transition conditions if terms are violated. Usd/Cad remains anchored around 1.2500 after trade deficit misses on both side of the NA divide, while the Aud and Nzd are both hovering nearer recent lows around 0.7860 and 0.7300 respectively, with the Kiwi not getting much traction from better than expected NZ jobs data as attention quickly shifts to the RNBZ policy meeting later today.

In commodities, WTI and Brent crude futures are trending lower this morning, with the latter breaking below USD 67.00/bbls despite the last nights API crude inventory data showing an unexpected drawdown. Some of the bearish sentiment could be attributed to the latest EIA forecasts, in which the agency upped their US oil production led by shale to 11.2mln bpd in 2019 from 10.85mln bpd. In metals markets, spot gold is modestly higher whilst copper was supported during Asia-Pac trade amid the improved risk appetite.

Looking at the day ahead, the data calendar continues to remain fairly sparse with December consumer credit data in the US the only releases of note. However there is plenty of central bank speak due with the ECB’s Nouy and Lautenschlaeger speaking in Frankfurt in the morning, while the Fed’s Kaplan, Dudley, Evans and Williams are all due to speak throughout the day.

US Event Calendar

  • 7am: MBA Mortgage Applications, prior -2.6%
  • 3pm: Consumer Credit, est. $20.0b, prior $28.0b
  • 8:30am: Fed’s Dudley Speaks in Moderated Q&A
  • 10:15am: Fed’s Evans Speaks on Economic and Policy Outlook
  • 5:20pm: Fed’s Williams Speaks in Hawaii

DB’s Jim Reid concludes the overnight wrap

If you’ve only been working in markets for a handful of years then treat the last 36 hours as a mild dress rehearsal for what can happen when a bear market hits. Yesterday actually felt relatively orderly though in spite of a 1,000 point range on the DOW and a c28 point range in the VIX. Orderly unless you were at the epicentre of things and an equity volatility trader. I’m teaching 2 and a half year old Maisie how to count to five at the moment and the VIX yesterday felt like watching her do that as when I ask her to count for me she says something likes this “….four, two, three, one, five”. It closed at 37.32 the previous session before climbing to 50.30 around noon London time, then collapsing to 22.42 just after the US opened 2.5-3 hours later, a spike back to 46.34 occurred less than an hour later and then after oscillating between 30-40 for the rest of the day we closed at 29.98 (-19.7%). The 50.30 print was the highest since early March 2009 when equity markets hit rock bottom. Remarkable really.

Yesterday afternoon Craig and I put a note out showing what happens 1 week, 1 month and 3 months after the largest 10 VIX spikes in history. Basically the VIX usually rallies over all subsequent periods but equities tend to be strong the week after but on average fall 3 months later. The reverse is true for bonds. See the quick note here for more details.

What might make this VIX spike slightly different to previous ones is that although it had a macro catalyst (higher inflation and yields) the scale of the wounds are mostly self inflicted within the equity derivatives product as the scale of the moves have been caused by low volatility ETPs/ETFs being liquidated, suspended and/ or suffering major losses.

In other words all the other previous major spikes have been more to do with a big macro event or a crisis. The higher average earnings print could turn 2018 into a year of higher inflation and a big macro shift but we’re certainly not in crisis territory yet.

This morning in Asia, markets are broadly higher after the positive lead from the US, but the rebound has been fading as we type though. The Nikkei (+0.84%) and Hang Seng (+0.70%) are up but have pared earlier gains of around 3%. The Kospi (-1.44%) and China’s CSI 300 (-1.13%) are now lower. The UST 10y yield is down c3bp. In the US, the House has voted 245-182 to extend government funding until 23 March. The bill will now go to a Senate vote, but one of the prior obstacle is now largely mitigated as Senator McConnell noted he’ll allow the Senate to debate the immigration bill later on if the government is not shut down this week. Elsewhere, President Trump noted “if we don’t change it (immigration laws), let’s have a (government) shutdown”.

Now recapping market performance from yesterday. US bourses were volatile with trading volumes the highest since the November 2016 election. The S&P initially fell 2.1%, then quickly recovered to trade sideways before a late rally to close +1.74% higher. The Dow (+2.33%) and Nasdaq (+2.13%) also rebounded. Within the S&P, gains were led by tech, materials and consumer discretionary stocks, with only the real estate and utilities sectors in the red.

In Europe, markets were all lower following the prior day’s selloff in US equities. The Stoxx 600 fell for the seventh consecutive day and was down 2.41% (biggest fall since June 2016), while the Dax (-2.32%) and FTSE (-2.64%) also fell. Credit Suisse dropped 6%, in part following headlines that one of its short-term EFN will be liquidated after the spike in VIX futures (from c$2bn market cap in late Jan.). Notably, CS said it has not suffered any trading losses related to the exchange traded note. Elsewhere, the VSTOXX jumped 60% back to June 2016 levels (30.18).

European government bonds benefited from the flight to safety with core 10y bond yields down c4bp (Bunds -4.3bp; Gilts -3.7bp; OATs -3.9bp). The UST 10y jumped 9.6bp to 2.803%, largely reversing the prior day’s rally. US credit indices also rebounded, with the spreads on CDX IG and CDX HY 2.8bp and 11.8bp tighter respectively. Turning to currencies, the US dollar index rose for the third consecutive day (+0.15%), while the Euro (+0.08%) and Sterling (-0.07%) were little changed. In commodities, WTI oil retreated for the third straight day (-0.36%) to $63.92/bbl. Elsewhere, precious metals weakened c1% (Gold -1.16%; Silver -0.55%) and other base metals also fell modestly (Copper -0.51%; Zinc -0.81%; Aluminium -1.19%).

Away from the markets and onto Germany. The coalition talks between Ms Merkel and the SPD are still ongoing, but Ms Merkel seemed more conciliatory. She noted “all of us will have to make painful compromises…I’m willing to do this if we can ensure that the advantages outweigh the disadvantages”. Elsewhere, a wage increase settlement was reached between the labour union IG Metall and employers. Overall, the deal will lead to 3.9% annual pay increase in 2018 and c3.5% in 2019 for union workers, which is at the upper end of expectations. This in our view should add to the evidence that inflation is indeed firming at a global level.

Finally before we recap the data and look at the day ahead, based on documents sighted by Bloomberg, the EU plans to implement the leverage ratio surcharge for globally systemically important banks, broadly in line with global standards agreed back in December. This implies large EU banks will be subjected to an extra 50bp-100bp leverage ratio buffer. Elsewhere, a spokesman for the Bulgarian presidency of the EU said there is “overall support” amongst EU members for the measure.

Now to yesterday’s data. In the US, the December trade deficit was slightly higher than expected at -$53.1bln (vs. -$52.1bln) and was also the largest monthly deficit since the GFC. In the details, exports rose 1.8% mom while imports grew 2.5% mom, with particularly strong growth in imports of consumer goods. The December JOLTS job openings was below market at 5,811 (vs. 5,961), but the quits rate edged up a tenth to 2.2%, broadly in line to last year’s readings.

Germany’s December factory orders was above market at 3.8% mom (vs. 0.7% expected) and 7.2% yoy (vs 3.1% expected), with growth mainly boosted by big ticket items in the month. The UK’s January BRC like for like sales was slightly below expectations at 0.6% yoy (vs. 0.7%), with that growth owing to a price-driven 2.9% yoy lift in spending on food. Elsewhere, France’s December budget deficit was narrower than last month at -€67.8bln (vs. -€84.7bln).

Looking at the day ahead, the data calendar continues to remain fairly sparse with December industrial production in Germany, December trade data in France and December consumer credit data in the US the only releases of note.
However there is plenty of central bank speak due with the ECB’s Nouy andLautenschlaeger speaking in Frankfurt in the morning, while the Fed’s Kaplan, Dudley, Evans and Williams are all due to speak throughout the day.